With the new financial year underway, the roll-over provisions under subdivision 328-G are now available to small business entities to restructure without adverse capital gain tax (CGT) consequences.
The rules significantly increase the flexibility to restructure businesses, particularly as part of an estate planning exercise.
This post considers the eligibility requirements for accessing the roll-over. A previous post has considered in detail a number of the main opportunities available under the provisions, see - 'Tantalising opportunities for trust restructures under new Subdiv 328-G'
Unlike other CGT roll-overs, the provisions allow direct roll-over of non-CGT assets such as trading stock, depreciating assets and revenue assets. The provisions do not however provide any relief in relation to related transaction costs such as GST or stamp duty.
Eligibility
The concessions are available to small business entities being individuals, companies or trusts whose annual turnover is less than $2M.
In order for the roll-over to apply, the following criteria must also be met:
- the CGT asset must be an active asset;
- an election must be made;
- the transferor and transferee must be Australian residents;
- the transactions must not change the ‘ultimate economic ownership’; and
- the transferee cannot be an exempt entity (for example, a superannuation fund).
The definition of active asset includes captures all assets used in a business except for company loans to shareholders and unpaid present entitlements which cannot be transferred under the provisions.
Ultimate Economic Ownership and Discretionary Trusts
The rules require that each relevant individual’s interest in the assets of the business remain in proportion after a restructure. Tracking economic ownership when using the provisions to transfer assets from an individual to a company, or from company to company is relatively easy.
Given the nature of a discretionary trust, where beneficiaries do not have a direct interest in the trust assets, the provisions set out how to determine whether ultimate economic ownership is maintained.
In particular, the rules create a ‘safety net’ test that allows access to roll-over relief if a trust has made (or makes) a family trust election. Where such an election is made, it effectively limits the range of potential beneficiaries who can receive a distribution without triggering a penal tax consequence (being the family trust distribution tax).
Integrity measures and the safe harbour rule
Given the very broad potential application of the provisions a discrete integrity measure has been included.
In particular, there is the requirement that any transaction is a 'genuine' restructure of an ongoing business.
While ‘genuine’ is not itself defined, a transaction will be deemed to fall within a safe harbour under the rules if for three years after the relevant restructure:
- there is no change in the ultimate economic ownership of significant assets;
- the significant assets transferred continue to be active assets; and
- the significant assets transferred are not used for personal purposes.
Conclusion
The 328-G concessions are arguably the most comprehensive CGT roll-over provisions introduced since the commencement of CGT. The new rules will provide small business entities with a myriad of restructuring opportunities.
View Legal will be live streaming a webinar on 21 July 2016 covering everything you need to know about the new small business roll-over rules.
For more information about the webinar and your opportunity to register, see the link below - https://viewlegal.com.au/product/webinar-small-business-rollover-rules/
The webinar will explore all technical aspects of the provisions and use numerous case studies, including:
- what constitutes a ‘genuine restructure’;
- using trust cloning and trust splitting as a restructuring method;
- restructuring heritage trusts with proximate vesting dates or limited variation powers;
- how to restructure from a sole-trader to a company owned by a family trust; and
- other planning opportunities.
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